In the past 11 years, India has witnessed an era of cooperative and fiscal federalism. The Centre and state governments have worked together on socioeconomic transformation for the achievement of shared goals. The ideal of Team India championed by Prime Minister Narendra Modi has been the driving force behind this approach. Institutional and process reforms of unprecedented scale have brought about exceptional impact at all levels, the most significant being the rise of 25 crore citizens from multidimensional poverty.
The transformation of the Planning Commission into the NITI Aayog in 2015 was an important change – it replaced a Centre-to-state one-way flow of policy with a collaborative partnership between the two. For long, knowledge resided where power was wielded. A phygital world is increasing the gap. NITI Aayog plays a vital role in bridging it. Unlike the Planning Commission, it encourages states to take ownership of their development agendas and has become a bridge between the Centre and states.
The Aayog’s annual Governing Council Meeting acts as the apex platform for the political leadership of the Centre and states to deliberate on issues of national importance. The annual Chief Secretaries Conference is a platform for the senior-most bureaucrats of the country to discuss challenges and share best practices. Its indices have acted as a catalyst for a competitive federal system, inspiring laggard states to improve their performance. The Aspirational Districts and Blocks Programme has been transformative in improving the quality of life of citizens from nearly 350 districts and 500 blocks. It has brought the most backward regions at par with state averages across key socio-economic parameters.
The key to development for states is the availability of sufficient resources. A significant step in this direction was the decision to increase the states’ share in the divisible pool of taxes from 32 per cent to 42 per cent. Recommended by the 14th Finance Commission and implemented by the Centre, this was the largest-ever change in tax devolution at one go. This was implemented in a cooperative spirit to provide autonomy to states in designing and implementing schemes. The Finance Commission’s formula has been constantly evolving to address the states’ fiscal autonomy and reduce inequality. Transfers to poorer states such as UP, Rajasthan and Chhattisgarh between the 11th (2004-05) and 15th Finance Commissions (2023-24) have seen substantial increases. If one looks at aggregate numbers from 2014-15 to 2024-25, states’ share in central taxes increased from Rs 3.37 lakh crore to Rs 12.23 lakh crore.
The GST Council has acted as a platform for fiscal federalism with decision making through consensus between the Centre and states. In actual terms, states receive around 71 per cent of the revenue from GST, while the Centre’s share remains at about 29 per cent. Since the rollout of GST, the Centre has foregone 0.5-1 per cent of GDP in revenue annually to fund the 14 per cent compensation guarantee to states. About Rs 6.52 lakh crore have been provided as GST compensation to states from 2017-18 to 2024-25.
The Centre’s commitment to fiscal federalism has empowered states with more resources in the last decade compared to the previous decade. The ratio of gross transfers (including states’ share in central taxes, grants, and loans) to GDP was 5.2 per cent in the decade preceding 2015-16, and has now increased to 6.5 per cent. During this period, grants from the Centre have increased by 234 per cent, and gross loans from the Centre have increased by a massive 992 per cent. The Union budget 2025-26 further proposed an outlay of Rs1.5 lakh crore for 50-year interest-free loans to states for capital expenditure. Even in states like Tamil Nadu and West Bengal, average central taxes and grants from the Centre as a percentage of total revenue increased from 25 per cent to 31 per cent and 49 per cent to 56 per cent, respectively, from the decade of 2004-14 to 2014-24. In absolute terms, the annual total transfer by the Centre to all states/UTs increased by Rs 14.96 lakh crore in this period.
The division of subjects into the Union, State and Concurrent Lists enables efficient distribution of responsibilities to each level of the government. However, the Centre continues to contribute to subjects in the State and Concurrent Lists through the Central Sector (CS) and Centrally Sponsored Schemes (CSS). Between 2015-16 and 2023-24, CS and CSS releases registered an increase of 197 per cent. Some of the CSS have had a transformative impact. The Jal Jeevan Mission witnessed a 570 per cent resource allocation increase between 2019-20 to 2025-26 and benefitted 15.44 crore rural households with tap water connections. Between its launch in 2018-19 and 2025-26, the budget estimate for PM Jan Aarogya Yojana surged by 292 per cent. Consequently, out-of-pocket health expenditure has declined from 62.6 per cent to 39.4 per cent, with recorded savings of Rs 1.25 lakh crore during the same period. From 2020 to 2025, the allocation for PM Awas Yojana-Gramin surged by approximately 181 per cent with 2.67 crore houses already constructed by 2024. The grassroots change that these impactful schemes have brought into the lives of common citizens is evident. The Centre’s commitment to cooperative federalism is equally evident as water, health and housing are all in the State List of the Constitution.
The word “federalism” is not specifically mentioned in the Constitution. Yet, it has been our guiding mantra. B R Ambedkar had said, “Our Constitution would be both unitary as well as federal according to the requirements of time and circumstances”. The last decade has been a testimony to the power of cooperative, competitive and fiscal federalism and the positive impact it has had on the lives of 140 crore citizens.
(Subrahmanyam is CEO and Shah is senior specialist, NITI Aayog. Views are personal)
